World leaders weigh stimulus vs. austerity at G-20

by JACK CHANG - Jun. 19, 2012 02:14 PMAssociated Press

LOS CABOS, Mexico - With major European economies on the brink of collapse, world leaders concluding an annual Group of 20 meeting were left Tuesday with two different paths to ease the financial crisis: Spend more to try to stimulate growth or slash budgets in a bid to restore investor confidence.

For months, that dilemma has loomed over governments and economists as they struggled to put out a debt-fueled economic wildfire that has threatened banks, wiped out jobs and toppled governments all over Europe. But on Tuesday, presidents and prime ministers meeting in this seaside resort seemed content to delay any decision for a while longer, at least according to a draft statement leaked ahead of the G-20's conclusion.

Still, the battle lines in the stimulus versus austerity debate were clearly drawn among the 24 heads of state gathered in a heavily guarded convention hall lined by a moat. The conservative leaders of the United Kingdom, South Korea and Germany came out decisively for austerity, warning that budget cuts were crucial to restoring fiscal order and worldwide confidence.

"The countries in crisis will have to find measures that might be painful and politically unpopular in the short term, but nonetheless they must pursue this path," South Korean President Lee Myung-bak said Monday.

On the other side were left-leaning governments such as those in Argentina, Brazil and France that have denounced the German-imposed austerity plan for struggling countries such as Spain and Greece and pushed for more stimulus spending.

After Argentine President Cristina Fernandez met with her Brazilian counterpart, Dilma Rousseff, the two sides were united in their opposition to the existing bailout plan.

"At the same time, they agree that we need to listen to Europe, especially to Germany, to see what measures it proposes to exit the euro crisis," Argentine Foreign Minister Hector Timerman said.

President Barack Obama did not take a clear stand on the issue while speaking briefly to reporters Monday, pledging only to work "hand-in-hand to both grow the economy and create jobs while taking a responsible approach."

The draft statement, which could still change before a final version is released later Tuesday, stops short of committing the nations to greater spending unless conditions worsen. The draft urges fiscal responsibility while looking to education, innovation and infrastructure investment to spur economies.

Such fence-sitting is typical of G-20 declarations, said Jacob Kirkegaard, a research fellow at the Washington-based Peterson Institute for International Economics. The specifics of any economic plan will likely be negotiated at a European Union summit to be held next week, he said.

"On the big issue of the hour, of weeks and months, the G-20 communique is not going to make a big difference," Kirkegaard said. "The communique will repeat the mantra about strong, balanced, global growth. With each member state free to do whatever they want, that's the way to paper over those differences."

Indeed, the statement's reassuring words failed to sooth troubled world stock markets, which remained mixed and nervous Tuesday.

Germany must shoulder a large share of the contributions to bail out economically weaker European countries that overspent for years. In exchange, Germany has been insisting on steep cutbacks from aid recipients such as Greece.

Those cutbacks have led to dramatic economic hardship for voters in Greece and other countries. A growing number of European countries have been advocating spending and growth, not austerity, and the G-20 statement made limited mention of such a possibility.

"We are united in our resolve to promote growth and jobs," the draft says, declaring that the leaders will announce the "coordinated Los Cabos Growth and Jobs Action Plan" to achieve those goals, although the draft does not provide details of the plan.

"Strong sustainable and balanced growth remains the top priority of the G20, as it leads to higher job creation and increases the welfare of people across the world," the statement reads.

It specifically supports greater government spending in countries that can afford it if conditions get significantly worse, saying countries with "sufficient fiscal space stand ready to coordinate and implement discretionary fiscal actions to support domestic demand."

The plan also hints at flexibility by asking that governments "take into account evolving economic conditions," which could open the way for more latitude in troubled countries such as Greece.

The draft plan also says the Obama administration pledged to prevent sharp tax increases and government spending cuts from kicking in at the end of the year, as scheduled under current law, to avoid sending the U.S. into another recession.

As G-20 officials wrangled over last-minute changes in the statement's wording, European leaders at the summit struggled to reassure the world that they were on the path to solving their economic crisis.

The cost of bailing out Spain's €1.1 trillion ($1.39 trillion) economy would likely outstrip current global ability, even after the International Monetary Fund announced late Monday that a round of contributions had increased its lending capacity to $456 billion, exceeding a round of pledges made in April. The countries making the biggest IMF contributions will be Japan, at $60 billion; Germany, at $54.7 billion; and China, at $43 billion. The United States is notably not contributing in the latest round.

The IMF said in a staff report Monday that Europe is unlikely to conquer its budget problems without a greater focus on policies that promote growth. European governments should simplify economic regulations and make it easier to hire and fire workers and let workers move to other European countries for jobs, the fund said. Those reforms could boost growth in the region by 4.5 percent over the next five years.

Even though the party that won Greece's election Sunday supports the bailout and staying in the euro currency zone, there is lingering disagreement over the terms of the international bailout, which required harsh cutbacks in spending that many in Greece blame for widespread hardship suffered by ordinary citizens.

German Chancellor Angela Merkel has indicated that finding room for negotiation might not be so easy, saying Greece had to uphold its side of the bargain.

But a European Union official on Tuesday argued that the terms of Greece's bailout will be renegotiated because worsening economic conditions have made the old bailout agreement an "illusion."

The official, who spoke on condition of anonymity, citing policy, said the goals of the agreement would not be changed: They remain to reduce Greece's debt to a level that is sustainable and to reform its economy to make it competitive. But how those goals are achieved, and over what time period, will be up for discussion.